The Market Call | May 2020

Macroeconomy

The two months (mid-March to May) of ECQ in Luzon, including Metro Manila, shall translate into a deeper GDP decline in Q2. A return to some form of normalcy may speed up by July, when government dismantles the lockdown in most of the country, and get the economy running at a faster pace in H2. However, this may prove insufficient to avert the first annual decline in GDP in 22 years, given the new health protocols and the difficulties in reestablishing supply chains. However, the sizeable fiscal stimulus and firms get into the full “new normal” mode, we expect a sharp GDP recovery of 8% to 9% in 2021.

Fixed-Income Outlook

With advanced economies struggling to recover and prevent deflation, bonds continue to attract investors. Domestically, low inflation and ample liquidity caused by the cumulative 125 bps cuts in policy rates and 400 bps slash of RRR since November 2019 should keep bond yields low. Corporate bond issuance may rebound in H2 but only to refinance existing debt as uncertainties abound.

Equities Outlook

Volatility will continue in the equities market since we still have the turbid air of uncertainty lingering. This will last until the complete lifting of Luzon-wide ECQ takes place and the process of normalization begins. COVID-19 will alter consumer behavior and take a bite on corporate profits, down 15.8% in Q1 (for 23 reports out of 30 constituent stocks), until the virus subsides. Nonetheless, the gradual recovery in H2 should improve general investor sentiment from the lows we have seen up to this point. Hence, we remain confident that the PSEi should rise past 6,500 by Q3. PSEi joined the global rally with a 7.1% uptick in April.